Expands Product Development Through Increased Investment in Electric Motorcycle Technology

Harley-Davidson, Inc. (NYSE:HOG) fourth quarter 2017 diluted EPS decreased to $0.05 from $0.27 in the fourth quarter of 2016. Fourth quarter 2017 net income was $8.3 million on consolidated revenue of $1.23 billion versus net income of $47.2 million on consolidated revenue of $1.11 billion in the fourth quarter of 2016. Fourth quarter 2017 revenue was up on higher shipments. Net income and EPS were adversely impacted by a $53.1 million income tax charge related to the enactment of the 2017 Tax Cuts and Jobs Act and a $29.4 million pre-tax charge for a voluntary product recall.

Full-year 2017 diluted EPS decreased to $3.02 from $3.83 in 2016. Full-year net income was $521.8 million on consolidated revenue of $5.65 billion versus net income of $692.2 million on consolidated revenue of $6.00 billion a year ago.

Harley-Davidson worldwide retail motorcycle sales were down 6.7 percent in 2017 compared to 2016. U.S. retail sales decreased 8.5 percent and international retail sales were down 3.9 percent.

“Our actions to address the current environment through disciplined supply and cost management position us well as we drive to achieve our long-term objectives to build the next generation of Harley-Davidson riders globally,” said Matt Levatich, president and chief executive officer, Harley-Davidson, Inc. “We finished 2017 with over 32,000 more Harley-Davidson riders in the U.S. than one year ago, and we delivered another year of strong cash generation and cash returns to our shareholders.”

Objective to Build Riders Globally

As the company executed against its long-term objective to build the next generation of Harley-Davidson riders globally, 57 new international dealer points were added in 2017, and U.S. dealers trained more than 62,000 riders through the Harley-Davidson Riding Academy. The company also maintained its number one 601+cc motorcycle market share position in countries including the U.S., Canada, Japan, Australia and India for 2017.

The company also launched its model year 2018 lineup of motorcycles, featuring the all-new, highly-acclaimed Softail motorcycles featuring the powerful Milwaukee-Eight engine. Harley-Davidson remains fully committed to investing in product development to inspire new riders through redefining its product in traditional spaces and expanding into new spaces. The company is on target to launch its first electric motorcycle within 18 months. Today, the company announces it will invest more aggressively to lead in the application of electric motorcycle technology to inspire ridership among a new audience.

“The EV motorcycle market is in its infancy today, but we believe premium Harley-Davidson electric motorcycles will help drive excitement and participation in the sport globally,” stated Levatich. “As we expand our EV capabilities and commitment, we get even more excited about the role electric motorcycles will play in growing our business.”

Manufacturing Optimization

Harley-Davidson plans to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization initiative anchored by the consolidation of its motorcycle assembly plant in Kansas City, Mo. into its plant in York, Pa. The company expects to incur restructuring and other consolidation costs of $170 to $200 million and capital investment of approximately $75 million over the next two years and expects ongoing annual cash savings of $65 to $75 million after 2020.

“The decision to consolidate our final assembly plants was made after very careful consideration of our manufacturing footprint and the appropriate capacity given the current business environment. Our Kansas City assembly operations will leave a legacy of safety, quality, collaboration and manufacturing leadership,” stated Levatich.

Harley-Davidson Retail Motorcycle Sales 4th Quarter

Full-Year

2017

2016

% Change

2017

2016

% Change

U.S.

23,195

26,077

(11.1)

147,972

161,658

(8.5)

Canada

1,318

1,257

4.9

10,081

10,203

(1.2)

Latin America

2,449

2,637

(7.1)

9,452

9,701

(2.6)

EMEA

7,460

7,891

(5.5)

44,935

45,838

(2.0)

Asia Pacific

7,720

8,748

(11.8)

30,348

32,889

(7.7)

International Total

18,947

20,533

(7.7)

94,816

98,631

(3.9)

Worldwide Total

42,142

46,610

(9.6)

242,788

260,289

(6.7)

In the fourth quarter, Harley-Davidson worldwide retail motorcycle sales declined 9.6 percent versus the prior year. Harley-Davidson U.S. retail motorcycle sales were down 11.1 percent and the overall industry was down 6.5 percent compared to the year-ago quarter. Harley-Davidson U.S. market share was 50.8 percent in the 601+cc segment in the fourth quarter.

Motorcycles and Related Products Segment Results $ in thousands

4th Quarter

Full-Year

2017

2016

% Change

2017

2016

% Change

Motorcycle Shipments (vehicles)

47,198

42,414

11.3

241,498

262,221

(7.9)

Revenue

Motorcycles

$801,726

$685,047

17.0

$3,825,206

$4,122,113

(7.2)

Parts & Accessories

$168,131

$169,445

(0.8)

$804,363

$842,637

(4.5)

General Merchandise

$71,236

$72,919

(2.3)

$262,776

$284,583

(7.7)

Gross Margin Percent

30.9%

30.7%

0.2 pts.

33.6%

35.1%

(1.5) pts.

Operating Income

$37,821

$9,271

307.9

$615,958

$773,406

(20.4)

Operating Margin Percent

3.6%

1.0%

2.6 pts.

12.5%

14.7%

(2.2) pts.

Fourth quarter revenue from motorcycles and related products was up versus the prior year behind higher motorcycle shipments. Operating margin as a percent of revenue increased in the quarter compared to the same period in 2016.

Financial Services Segment Results $ in thousands

4th Quarter

Full-Year

2017

2016

% Change

2017

2016

% Change

Revenue

$181,883

$177,577

2.4

$732,197

$725,082

1.0

Operating Income

$63,674

$60,139

5.9

$275,305

$275,530

(0.1)

Financial services operating income increased 5.9 percent in the fourth quarter compared to the year ago period.

Income Tax Rate

For 2017, Harley-Davidson’s effective tax rate was 39.6 percent compared to 32.4 percent in the prior year. The increased tax rate was largely due to the impact of the write-down of deferred tax assets related to the 2017 Tax Cuts and Jobs Act.

The Company expects its 2018 full-year effective tax rate to be approximately 23.5 to 25.0 percent, down considerably behind the expected benefit of the new tax legislation.

Other Results

Cash and marketable securities were $687.5 million at the end of 2017, compared to $765.5 million at the end of 2016. Harley-Davidson generated $1.01 billion of cash from operating activities in 2017 compared to $1.17 billion in 2016. On a discretionary basis, Harley-Davidson repurchased 8.7 million shares of its common stock at a cost of $456.1 million during 2017. During the fourth quarter of 2017, 169.2 million weighted-average diluted common shares were outstanding. At the end of 2017, 10.6 million shares remained on a board-approved share repurchase authorization.

2018 Outlook

For 2018, Harley-Davidson anticipates full-year motorcycle shipments to be approximately 231,000 to 236,000 motorcycles. In the first quarter of 2018, Harley-Davidson expects to ship approximately 60,000 to 65,000 motorcycles.

Harley-Davidson expects full-year 2018 operating margin as a percent of revenue to be approximately 9.5 to 10.5 percent including manufacturing optimization costs of $120 to $140 million.

The company anticipates 2018 capital expenditures of $250 million to $270 million which includes approximately $50 million to support manufacturing optimization.